The new Conduct of Employment Agencies and Employment Business Regulations 2003 - What are the VAT implications for your organisation?

18 February 2004

The majority of us deal with employment bureaux from time to time to supplement our workforce. Such businesses are regulated, and the new Conduct of Employment Agencies and Employment Businesses Regulations 2003 will come into force on 6 July 2004. Customs and Excise have recently published a Business Brief explaining its view of the VAT implications arising from changes that these Regulations may bring in, which may well affect your organisation in the future.

In summary, an employment bureau would normally have to charge a client for both the salaries of staff provided and a commission or fee, and would then be liable for VAT on this global figure. However, there is currently a VAT concession whereby if the client (rather than the employment business) pays the staff salaries either directly or through a third party payroll company, VAT is not charged on those salaries, but only on the commission charged by the employment business. This is known as the staff hire concession.

The staff hire concession will be reviewed in the 18 months after 6 July 2004 and no changes will be made during that period.

Whilst there is some time to go before these changes impact, some preparation should be made now in case the staff hire concession is withdrawn at the end of the review, and employment bureaux pass on the cost of the VAT on salaries to their clients. For example, are you able to exit any contracts with employment businesses at minimum cost if there is a change to the staff hire concession? You might wish to change the way that contracts are drafted to insert a clause that gives you the right to:

• reduce payments to the employment business; or
• terminate the contract at short notice. 

The property dimension

The Customs and Excise Business Brief also covers employment bureaux which hire out temporary workers as wardens or estate managers. These businesses can choose to act as agents, and charge VAT on their commission only. Those that hire out their own employees may use the staff hire concession, and therefore may be affected by any review that is carried out. Managing agents cannot use this concession, although may construct their charges as domestic service charges, which are VAT exempt.